Sequential Investment And Time To Build
AbstractReal world investment decisions are generally made sequentially, over time. Management must consider the possibility of subsequent decisions like suspending a project when an initial investment decision is made. This consideration seems to be particularly important in the case of investments, which take a long time to build. In this paper, I analyze the impact of lags between the initial investment decision and the completion of the project. I also analyze in a dynamic setting under uncertainty the impact on the investment value of the option to suspend investment or operations and the investment threshold. I show that the standard net present value rule works well within my framework. This result contrasts with the main results in most of the real options literature. I use my model to value the length of permit procedures for locational decisions.
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Bibliographic InfoArticle provided by LMU Munich School of Management in its journal Schmalenbach Business Review.
Volume (Year): 54 (2002)
Issue (Month): 1 (January)
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- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
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- Barbara Harreiter & Thomas Pfeiffer & Georg Schneider, 2007. "Are real options more valuable in the presence of agency conflicts?," Review of Managerial Science, Springer, vol. 1(3), pages 185-207, November.
- Gilroy, Bernard Michael & Lukas, Elmar, 2005.
"The Choice between Greenfield Investment and Cross-border Acquisition: A Real Option Approach,"
18819, University Library of Munich, Germany.
- Gilroy, Bernard Michael & Lukas, Elmar, 2006. "The choice between greenfield investment and cross-border acquisition: A real option approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(3), pages 447-465, July.
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